Despite underperformance this quarter, the Fund remains focused on high-quality companies aligned with long-term sustainable themes. Headwinds came from market preference for large-cap and value stocks, as well as sector rotation. However, with compelling valuations and strong growth potential in areas like healthcare and digital security, the team is confident in the long-term outlook.
The Sustainable Future European Growth Fund returned a negative 0.4% compared to the index at 7.4%, as high-quality growth companies where we focus, trailed the index. The strong performance in European equities posted in Q1 was driven by an uptick in inflows into European equites, maybe as global investors look to diversify some of their large exposure to US equities which are trading at a premium. In February, optimism in European equities rose following German elections where the new administration signaled a pivot towards pro-growth policies, with broad implications for sectors such as construction, engineering and in particular defence. This positive momentum was somewhat tempered in March as markets pulled back in response to US tariff policies. The Sustainable Future European Growth Funds lagged this value-led rally for three main reasons, which can be grouped into size, style, and sector.
If we look at size firstly, the Fund has a structural long-term focus on small and medium-sized companies relative to the index. These innovative smaller companies are tackling some of our most complex problems. However, for the past three years these smaller companies have underperformed their larger counterparts in a risk-off and a higher interest rate environment. Indeed, European small companies are now trading at the lowest valuation relative to the index for over 15 years. The long-term upside in small and medium sized companies in Europe is now incredibly attractive and we are well positioned to take advantage of this inevitable recovery in smaller companies.
Secondly, style has also been a headwind with growth investing also being out of favour with the market since the start of 2022 and value style investing being rewarded in a higher interest rate environment. However we believe that our sustainable growth focus and our themes remain as relevant as ever, with strong and predictable growth towards a cleaner, healthier and safer economy. And we also believe that quality companies that can maintain their high returns on capital are the best ways to protect and grow capital over the long-term.
Finally, sector positioning has also been challenging for our sustainability focused process with an overweight positioning in healthcare and technology companies. Both sectors have undergone a significant cyclical upheaval resulting from the COVID pandemic suddenly spiking demand and abruptly shutting off in an effort to run down inventories. Again if we take a step back and look from a long-term perspective, we see lots of evidence supporting the thematic growth opportunities in these sectors. Take 'Innovation in Healthcare' for example, with our companies developing new therapies for a rapidly ageing population, living with many more chronic illnesses. Or 'Enhancing Digital Security', helping to secure an increasingly digital economy. We believe therefore that being aligned to these themes, which are out of favour, will in the long-term, be rewarded by the market.
If we turn to stock specifics, we would highlight Spotify as a strong contributor to performance. The company posted better than expected subscriber growth and continued their improvement in profitability with margins also topping expectations. We continue to believe that Spotify has a bright future, providing value for money for consumers, as well as a vital revenue stream back to the music industry. On the negative side, we had poor performance from our long-term holding in sportswear company Puma, who downgraded their profit guidance due to strategic missteps and a general lack of consumer confidence impacting the industry. We are reviewing our thesis in the company and look forward to meeting the new management team as soon as possible. We would like to highlight one new holding in the Fund, which is Asker Healthcare Group, a distribution company focusing on Scandinavia and Northern Europe. The company is exposed to our 'Providing Affordable Healthcare' theme, and Asker aims to improve patient outcomes, reduce costs and ensure a sustainable supply chain. The premise behind Asker is to use their increasing scale advantage in procurement to reduce the costs of sourcing medical supplies, devices and equipment and pass part of that savings on to hospitals, GPs, care homes, and other healthcare users. This new position was funded by selling our position in technology company, SAP. We've held the position for over 10 years and after a strong rally in share price, the company was no longer compelling from a valuation standpoint. Back to the portfolio as a whole, our companies are outgrowing the market by providing some solutions to our toughest problems. They continue to invest in their competitive advantages, enabling them to deliver strong profit growth over the long-term. And overall, the portfolio is attractively valued relative to history, particularly with our tilt towards smaller, growing companies. So whilst this has been a difficult period of performance, we believe that we have the right building blocks over the long-term to outperform.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Sustainable Future Team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Future Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
